Corporation or Sole Proprietor?
You are about to enter into a new business, or perhaps you are expanding your current operations. One of the most important questions you should consider is “Do I need to Incorporate?” Generally, your business will be 1 of 2 structures, a Proprietorship or a Corporation. A proprietorship is an unincorporated business entity entirely owned by an individual, resident of Canada. Examples of a typical proprietorship would include: • A bookkeeper, operating from their home part-time to earn extra income. • A handyman, operating from their home part-time to earn extra income. A proprietorship is likely the most common form of business structure in Canada. Income from a proprietorship is reported on the individual’s tax return (T1 Schedule 2125) and is generally not subject to many additional provincial or federal rules, with the exception of proper financial reporting on the tax returns. The Sole Proprietorship is the simplest form of operating a business. Only one person is responsible for decision making and therefore earns all of the profits or incurs all of the losses of the business, however, the same individual also incurs all of the risk and obligations associated with running a business. A Canadian Controlled Private Corporation (CCPC), also known as a Corporation or Company, will have Limited, Inc. etc. after their name. A corporation is an entirely separate legal entity and is treated as having its own legal personality, which is distinct from its owners, (Shareholders) and the individuals responsible for running the Corporation (Officers and Directors). To qualify as a CCPC, the shareholders of the Corporation must be Canadian Residents. Each structure has its own advantages and disadvantages, and you should discuss your situation with Accounting and Legal Professionals before you make any decisions in this regard.
Advantages & Disadvantages of a corporation
There are many advantages and disadvantages, we will highlight a few: Advantages: Limitation of liability: Although you will always be liable to pay government taxes and bank loans, you may not be personally liable for other debts such as trade payables, lawsuits etc.
Lower Tax Rate: Generally, corporations are taxed at a lower rate than proprietorships.
Income Splitting: If your corporation is structured properly, it is possible to transfer income to other members of your family (shareholders)
Capital Gains: You can take advantage of the Capital Gains Exemption if you decide to sell your business at some point in the future. Disadvantages: Fees: Corporations incur higher fees for legal and accounting services
Borrowing: Banks and other credit lending institutions could still require a personal guarantee from the Directors.
Double Taxation: Dividends from the corporation may be subject to double taxation
Reporting Requirements: Corporations typically have more reporting requirements with CRA and other legal entities. Proprietorships also have advantages and disadvantages: Advantages: Relatively simple to establish, generally you can operate a business in your name with no registration requirements.
Lower administrative costs, possibly simpler to manage without double taxation.
Business losses may be used to offset income from other employment sources. Disadvantages: Unlimited liability: The business owner is personally liable for all actions of the business
Fiscal Periods: Proprietorships must use Calendar Year for reporting their year end.
Harder to Sell: Proprietorships are typically harder to sell, since the business is the actual owner.
As you can see, there are many things to consider in choosing the best structure for your needs. Do not rely on my neighbour said I should incorporate, talk to a professionals first. Incorporating can cost you significant amounts of money in accounting fees, legal fees and more, but often time the benefits far outweigh the cost of administration.